Shocks and risk sharing in the EMU: Lessons for Banking and Capital Market Union

A short policy piece by Mathias Hoffmann and his co-authors Bent Sorensen, Egor Maslov and Iryna Stewen on how to ensure that risk sharing in EMU becomes resilient to systemic banking shocks has just appeared in a new CEPR e-book edited by my colleagues Jan-Egbert Sturm and Nauro Campos entitled

In this piece we build on some of our earlier and on ongoing current research to compare the state of banking integration in the EMU today to that in the U.S. prior to state-level banking deregulation in the 1980s. As in the U.S. then, EMU today is essentially an integrated interbank market. But— as was the case among states in the U.S. prior to 1980— there is little direct cross-border lending of banks to firms or cross-border branching in the EMU. This makes macroeconomic risk sharing susceptible to systemic crisis as well as to country-specific banking sector shocks. We conclude that a proper banking union will have to encourage the cross-border consolidation and branching of banks and that this has to be complemented by a proper capital market union that encourages the cross-border ownership of equity. Just focusing on one of the two unions —as is currently advocated by some policymakers—will not be enough. A pre-publication version of the piece can also be downloaded here.

The book was launched ahead of the June 25th EU summit with some presentations by the authors across Europe, including two by Mathias Hoffmann at the Bank of Finland on June 19th and at ETH Zürich on June 22nd.